Strategic Operations Decisions Help Companies Profit from the Downturn

Savvy managers look for opportunities to profit from the downturn with careful facilities management and strategic positioning business operations.

Richard J. Maturi (August 2012)

{{RELATEDLINKS}}To be sure, many corporations and their work forces undergo severe pain during a downturn. However, there is a silver lining: While some corporate managers hunker down for the duration of the downturn, more savvy management looks for opportunities to profit from the downturn by careful facilities management and strategic positioning of their business operations.

"We needed more warehouse space and a way to showcase our products and services and meet with suppliers. As a result of the downturn, we acquired this warehouse/office space at more favorable rates than we were paying before. Then, we gutted the facility and tailored it to our purposes. [Previously,] we were always meeting with potential customers and suppliers in cramped quarters or at work counters; now we have a beautiful office space that sets a more professional tone," says Giannone.

Home and/or Virtual Offices
Edge's CEO did not stop there. She also closed some offices around the country and downsized others to make the sales force more flexible and productive. Many sales force personnel currently work out of their homes or virtual offices closer to their customers.

"We closed down our expensive California sales offices. It was a win-win situation. Edge cut costs dramatically and our sales force cut their personal work-related costs such as rent, insurance, and travel [expenses.] By closing down our California sales offices, we were able to expand our sales force by more than 10 percent nationwide," Giannone points out.

Understandably, Edge's sales force was a bit skeptical about the new moves. But they were soon won over. One sales force member explains the new setup this way: "I have a quiet house with a dedicated office. I am up early and can log in and take care of a lot of work before most other people begin their workday. I can work a weekend and get caught up on things after a busy week, when in the past I did not have access to the office [on weekends]. On days when I might not be feeling 100 percent and might have called in sick, I can work from home and put in a productive day without affecting others. My dry cleaning bill is lower; no one else drinks the last cup of coffee but me; there is no office gossip; and I enjoy working with my dog at my feet."

"Overall, we've cut our costs, improved out bottom line by 10 percent, and have a more efficient operation," Giannone emphasizes.

The use of virtual offices (such as those offered by Regus) provides flexibility, up to-date-equipment and communications capabilities, and meeting rooms located at convenient spots around the country and the globe. The cost savings - compared to stand alone office space - can be considerable.

"Companies that lease their own office space, pay their own office utilities, and hire office staff can save up to 60 percent when switching to `pay what you use' services," says Guillermo Rotman, CEO of Regus Americas.

Strategic Moves/Leasing Deals
Another company that made a strategic move is Superconductor Technologies (STI). STI recently moved its corporate headquarters from Santa Barbara, California, to Austin, Texas, in order to locate its corporate headquarters in a high-tech facility that also encompasses its world-class HTS wire production.

"After considering the technical talent pools, facilities, and energy costs in a number of states, we determined that Austin was the best location for our Conductus ® superconducting wire Center of Excellence. We decided to co-locate our corporate headquarters with the superconducting wire operation since we expect this initiative to be STI's primary business going forward," says Jeff Quiram, STI`s president and CEO.

On the leasing front, when household products manufacturer Reckitt Benckiser sought to improve its warehouse situation in Mechanicsburg, Pa., it turned to the commercial real estate firm of Newmark Grubb Knight Frank.

"Back in 2010, Reckitt Benckiser leased an 812,000-square-foot warehouse at above-market rates; the lease was due to expire in two years. The company wanted us to explore potential savings by either locating its distribution center closer to its manufacturing facilities in Belle Mead, N.J., in order to slash transportation costs, or renegotiating its current lease early," says David Simson, vice chairman/CCO for Newmark Grubb Knight Frank in New Jersey.

The firm searched the New Jersey industrial market for suitable facilities at competitive prices and submitted RFPs to prospective landlords, while continuing to re-negotiate with the current landlord. As a result of the controlled auction process, where landlords competed for Reckitt Benckiser's tenancy putting considerable pressure on the existing landlord, the company was able to re-negotiate a seven-year extension at its current warehouse location with an immediate $2.75 million in free rent in 2010 and an aggregate value of $20 million over the life of the contract.

"The reduction in lease costs helped offset the transportation cost. Reckitt Benckiser achieved its goal of cutting costs without having to move its warehouse operations," stressed Simson.

Scott Grossfeld, attorney and partner in the Los Angeles office of real estate law firm Cox Castle & Nicholson, points out, "Tenants have a lot more leverage in today's business climate. Landlords used to insert rigorous demands on the tenant, but that is not so easy to get by with today."

{{RELATEDLINKS}}More Favorable Terms
For example, tenants leasing retail space are often able to obtain more favorable terms on key leasing provisions, such as opening coverage for one business day, co-tenancy, and use clauses.

"In today's volatile economy, retail tenants do not want to commit to more than an one day opening in case the economy or market area turn down. Likewise, the co-tenancy clauses are very important. Retail tenants do not want to be tied to a property if a major anchor store closes. They want the right to terminate their lease in that event. This is not an absolute but contingent on specific instances. These provisions were unheard of several years ago," explains Grossfeld.

Similarly, in the writing of use clauses, tenants are demanding and obtaining broader definitions of use. In some cases they are obtaining the right to use the property for any lawful use and not a restricted use.

Harold Bordwin, co-president of GA Keen Realty Advisors, tells how they helped Dollar General Corporation strategically manage their store leases. "Even though Dollar General maintains its own large real estate department that reviews leases with 12 months left on the lease on an ongoing basis, corporate management wanted to accelerate the process and include stores with leases with 12 to 36 months left in the lease. With today's economy, Dollar General's negotiating leverage is stronger now than it may be in two to three years out if the economy improves. This represented an excellent opportunity to discuss with the landlords extending the leases for longer periods at more favorable terms to Dollar General, thus making individual stores more profitable," stresses Bordwin.

When times get tough, the tough get smarter. Don't sit on your hands waiting for the downturn to end, review your operations and look for opportunities to make your company leaner and stronger. Negotiate new leases, search out and obtain previously unavailable prime facilities, and beat your competitor to the punch.